Why Public Banks Are Suddenly Popular

There's only one in America—in North Dakota. But a growing movement is pushing for them across America, from L.A. to D.C.

August 10, 2018

Later this year, on the midterm ballot, voters in Los Angeles, California, will be asked an uncommon question: Should the city be to allowed to create a public bank?

L.A.’s referendum, which would not itself create a public bank, has attracted the support of left-wing figures like New York congressional candidate Alexandria Ocasio-Cortez and filmmaker Michael Moore, in addition to advocates for legalized cannabis. And the idea is gaining traction to other blue cities and states. New Jersey’s Democratic governor, Phil Murphy, campaigned on the creation of a public bank. City officials in Washington, D.C., held a public meeting last month to discuss the possibility. The movement has also spread to New York City and Oakland.

A public bank is what it sounds like: a financial institution owned by the government, funded with taxpayer money, and directly accountable to elected officials and civil servants. For this reason, supporters believe they offer a transparent alternative to private banks like Bank of America, which was fined $42 million this year for lying to customers about its management of stock trades, or Wells Fargo, fined $185 million for opening fraudulent accounts for customers without their consent.

But the appeal of public banks extends beyond consumer protection to sound fiscal policy. The argument, as articulated by Demos in a 2011 report, says banks can offer lower debt costs to city and state governments, fund public infrastructure projects, and encourage entrepreneurship by providing loans to small businesses at lower interest rates and with lower fees.

“It’s a way to keep our money here as opposed to holding it in these large Wall Street banks that we pay egregious interest and financial fees to,” Kayvan Khalatbari, a mayoral candidate in Denver, told Westword. “This is not a new idea, these exist all over the world. Germany is fueled by public banks, and look, they have the best economy in Europe.”

Press coverage of L.A.’s proposed public bank frequently refers to it as “the weed bank” because activists have trumpeted it as a means to protect growers and dispensary owners. Federal law still prohibits the growth and sale of marijuana, and Attorney General Jeff Sessions has promised a crackdown on states that have legalized it. So private banks often refuse to handle pot profits, which could make the banks legally complicit in money laundering. Banks owned directly by cities or states that have legalized marijuana are a safer option for the industry. Without a bank, dispensaries often rely on cash, which leaves them vulnerable to theft and makes it difficult for them to grow their businesses, as The Daily Beast reported in July.

But public banks could benefit more than the marijuana industry. “A public bank is like a bankers’ bank, except that is owned by the state or municipality or county depending upon how the legislation is phrased,” Deborah Figart, a distinguished professor of economics at University of Stockton, told me. “Rather than taking deposits and lending to individual customers, for your mortgage or your car loan, it lends money to the municipality or the state or does public-private partnerships to invest in public infrastructure.”

In April, Figart called for New Jersey to conduct a feasibility study to examine the impact of a public bank. Drawing on earlier feasibility studies in Sante Fe and Vermont, Figart estimated that a state-owned bank would yield $16 million to $21 million in output for every $10 million invested, raise state income from $3.8 million to $5.2 million, and add 60 to 93 jobs. Unlike private banks, public banks would also contribute profits to city or state governments, depending on how they’re structured.

Public banks aren’t purely hypothetical, though. One already exists in America, and it has been thriving for nearly a century.

The Bank of North Dakota, founded in 1919, was created out of economic uncertainty: Farmers, concerned that large grain traders and banks based outside the state threatened their economic sovereignty, saw a public bank as a means to protect themselves from exorbitantly high interest rates that put their farms at financial risk. The bank offered farmers more equitable access to capital, and despite initial fears that it represented a Bolshevik takeover of the state, the bank eventually gained bipartisan support.

Today, the bank is a healthy: Its 2017 annual report says its income has risen steadily since 2013, and the state’s return on its investment is 17 percent. Khalatbari, the Denver mayoral candidate, said North Dakota’s bank helped the state survive the recession “better than any state in the United States.” That’s probably a stretch. The oil boom has a lot do with North Dakota’s fiscal health, and even the bank’s president has cast doubt on the idea that the institution was largely responsible for the state’s relative fiscal health during the recession.

But as The American Prospectreported in 2013, North Dakota was the only state in the country not facing a revenue shortfall in 2009. In fact, the state possessed a surplus, thanks in part to the bank: The Associated Press reported that the bank had “funneled almost $300 million in profits to North Dakota’s treasury” since 2000. It seems fair to say that the public bank did help somewhat—not just through its contributions to the state’s general funds, but through its partnerships with private community banks and its willingness to invest in community development projects.

As David Dayen noted for In These Times in 2017, the Bank of North Dakota offers fairer loans than the state government might find elsewhere. “BND’s Infrastructure Loan Fund, for example, finances projects at just two percent interest; municipal bonds can have rates roughly four times as high,” he wrote. For this reason, activists with Public Bank L.A. argue that a city bank could loan the city money, below market rates, to build more public housing and support the development of a greener energy infrastructure.

Of course, it’s not cheap to start a bank of any kind. A feasibility study conducted by the state of Massachusetts estimated that a state-owned bank would require $3.6 billion in start-up capital. Further complicating matters, a spokesman for Los Angeles’ legislative analyst’s office told the city council in March that while state bonds initially helped fund the Bank of North Dakota, Los Angeles’ city bonds could only be used for infrastructure projects, not start-up capital. “That leaves using general fund money or finding philanthropists willing to bankroll, literally, a municipal bank,” the spokesman said.

Dean Baker, a senior economist at the Center for Economic and Policy research, says that public banks certainly have their benefits. They “can offer competition with the existing banking system, and could be a way to help expose abuses.” But they’re not likely to be a transformative economic force. “Some of its proponents really think this is the key to prosperity,” he said. “And I just can’t see that. I think it could bring fees down. I think, again, it could help to expose abuses in different areas because clearly the banks do a lot of gouging. I think that those are very, very good things. But I really can’t see a story where a public bank qualitatively changes the state of the economy in a city or state that institutes it.”

Even if voters in L.A. approve the referendum, significant hurdles remain. The city would have to determine if changes need to be made to state law—and, if so, work with state legislators to make those changes. The city has to find enough funds for the bank’s start-up capital, and it must contend with the fact that a new public bank wouldn’t be immediately profitable. It also must contend with private banks, which generally oppose public banks. “The banking community would say that they already take care of all the lending needs for roads and bridges and infrastructure and housing and green energy and child care facilities,” Figart said. “But if you look at any report about our failing infrastructure and the needs in our urban areas and in our rural areas, you will see that the money is not necessarily being lent out at reasonable interest rates to fulfill these local and state and other municipal needs.”

Public banks won’t fix the banking industry, and they won’t cure governments’ fiscal woes. But surely North Dakotans shouldn’t be the only ones who get to benefit from one.